Outlook: It was the City wot did it as Byers finally falls on his sword

Vodafone losses; With-profits funds

It is ironic that the Deputy Prime Minister, John Prescott, chose to give a speech trumpeting the Government's commitment to the public private partnership on the very day that Stephen Byers announced his resignation. For, as Mr Prescott and the rest of the Cabinet surely know, the now ex-Secretary of State for Transport did more to undermine the PPP than any minister in recent times.

Mr Byers' shabby treatment of Railtrack and its shareholders guaranteed that the City would look long and hard the next time the Government asked the capital markets to fund a big infrastructure project. As the CBI's new president, Sir John Egan, remarked last week, governments were once thought of as predictable beasts but Railtrack proved that is no longer necessarily so. The City is an unforgiving place. At the most extreme, the City might have refused to finance the PPP at all. What is much more likely, however, is that the financial markets will simply charge the Government more for supplying the finance. Mr Byers' epitaph will be as the minister who cost the taxpayer more money, not less.

Mr Byers already had a chequered history by the time he arrived at the Department of Transport. His tenure at the Department of Trade and Industry is largely remembered for a capricious approach to merger policy which made even his Tory predecessors look consistent, as well as an inability to anticipate and deal with big industrial crises. He ridiculously referred the cable companies to the Competition Commission at the bidding of BSkyB, leaving the Commission at a loss to understand what it was meant to be investigating. He was caught flat-footed by the Rover affair, so much so that he was still insisting its future was secure on the night that BMW pulled the plug.

His handling of the Corus steel closures crisis was scarcely any more adroit, with the result that Mr Byers was reduced to denouncing the company and attempting to lie his way out of trouble. Mr Byers' mismanagement of the transport brief surpassed anything that had gone before. His 10-year transport strategy has been savaged by a Commons committee dominated by his own backbenchers, the PPP for National Air Traffic Services is unravelling and the railways seem only to have deteriorated further since Mr Byers came up with the idea of handing them over to a not-for-profit trust. Throughout it all, Mr Byers was presumably pursuing some sort of an agenda. It is just that nobody could figure out what on earth it was meant to be.

Vodafone losses

In the end, the City seems to have got it almost wholly wrong on Vodafone. The full year loss reported yesterday, though the largest in British corporate history, wasn't nearly as big as many analysts thought Sir Christopher Gent, the chief executive, needed to declare in order properly to reflect the loss of value that has occurred for his acquired mobile assets. There was no share buyback, nor was there any hike in the dividend beyond that already flagged up. As it happens, that's what the house broker, Deutsche Bank, said would happen last week, but most others chose to ignore Deutsche's predictions. Instead, they suggested, Vodafone would need to sweeten the pill of vast writedowns with news of a big dividend and shares buyback.

How come the City got the wrong end of the stick? Well, perhaps it didn't. Perhaps it is Sir Christopher who's out of step. The big area of contention is in the so-called "asset impairment charge". With the market down in the dumps, these massive charges are as much a feature of technology and telecom company results as overly inflated forecasts of Ebitda were at the height of the boom. For incumbent managements, they are highly embarrassing, amounting as they do to an admission that assets bought in more profligate times are not worth nearly as much as was paid for them.

In the latest figures, Vodafone has taken a £6bn asset impairment charge against profits. It sounds a lot, but in fact it is not much more than was admitted to at the half way stage, and it relates only to Arcor, the German fixed line business, Japan Telecom, and the group's investment in China Mobile. The Mannesmann mobile assets, bought at the top of the market for shares in March 2000, are left wholly untouched. So too are the billions Vodafone paid for 3G licences in Europe. Sir Christopher is as optimistic about prospects for these businesses as ever, and he's done his own, 10-year cash flow projections to back him up. There is no need to write down the value of mobile assets, he insists.

Large parts of the City remain unconvinced. Sir Christopher is resisting pressure to buy back shares because he wants to use his free cash flow for more acquisitions and to buy out minorities. It is hard to persuade the City of the wisdom of such a strategy if you've just admitted to overpaying hopelessly for your last lot of acquisitions. Nor would Sir Christopher be able convincingly to stand up at the forthcoming annual meeting and justify the payment of the second half of his £10m bonus, a sum he was awarded in recognition of his heroic contribution to shareholder value, if he's just admitted that, er, it's value destruction he's getting the money for.

Some of the bigger City estimates of what Sir Christopher should have written off may be exaggerated. But he still seems to have his head in the clouds in believing nothing needs to be done at all.

With-profits funds

The Financial Services Authority has beaten Ron Sandler to the punch in publishing proposals for the reform of the "with-profits" life assurance industry. Mr Sandler, who is conducting a separate Government sponsored review of the long-term savings market, promises blue skies thinking on what should be done with this deeply unsatisfactory form of saving. The FSA has adopted a measured and practical approach to the immediate problems at hand – lack of transparency, poor governance, unfair asset allocation and all the other issues raised by the mortgage endowment débâcle and the collapse of Equitable Life.

As the FSA points out, with-profits funds may be flawed in the way they operate, but they have also proved highly popular ways of saving, with funds under management of a staggering £385bn at the last count. Even if the effect of what Mr Sandler proposes is to undermine the traditional with-profits fund, this legacy of savings still needs protecting and properly regulating. Few would quarrel with what the FSA proposes to improve standards of governance and make what goes on inside the black box of the smoothing process more transparent.

Mr Sandler will go further by recommending that the traditional 90/10 split in assets and bonuses between policyholders and the managing company be dismantled, leaving the fund wholly owned by policyholders and managed at arms length for an agreed fee by the proprietary life company. By setting up an established procedure for division of inherited estates between policyholders and shareholders, the FSA anticipates some of these changes. Many in the life assurance industry haven't yet come to terms with the tidal wave of change which is about to hit them. Lack of transparency has protected a plethora of weaker players from the cruel winds of proper competition. It is a brave new world they are about to enter, and those not fully prepared will wither and die.

jeremy.warner@independent.co.uk